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Funding

Financial Risk Management

Financing & Treasury Highlights


Financial Management

The Group’s financing and treasury activities are largely centralised within SembCorp Financial Services (SFS). SFS acts as the funding vehicle of the Group, on-lending funds borrowed by it to companies within the Group, except for the two listed entities, SembCorp Marine and SembCorp Logistics, which have their own sources of financing. SFS is also the cash manager for the Group, taking in surplus funds from business units with excess cash and lending to those with funding requirements. This has resulted in more proactive cash management and a more efficient and cost-effective way of financing the Group’s growth.



Funding
During the year, SFS refinanced the outstanding S$238.0 million project financing loan in SUT Sakra,
which generated significant savings in interest costs for the Group, and also allowed the release of “trapped” cash.

The Group continually seeks to consolidate and diversify its sources of funding by building on its existing bilateral banking relationships and developing new ones and also accessing the capital markets as and when appropriate.

During the year, the Group’s available credit facilities increased by S$802.6 million to S$7.0 billion, of which 66% were in the form of bilateral banking facilities and with the other 34% accessible from the capital markets. Unutilised facilities and funds available increased to S$6.0 billion as at end-2004, from S$3.8 billion at end-2003. Foreign currency borrowings constituted 20% or the equivalent of S$396.0 million.

During the year, a S$1.5 billion multi-currency multi-issuer Medium Term Note Programme (the Programme) was established under SFS, which will also enable other subsidiaries of the Group from time to time, to issue debt under the Programme. The Programme also aims to achieve a more tax efficient capital market funding for the Group, and will replace SembCorp Industries’ S$2.0 billion multi-currency Medium Term Note Programme (SCI MTN). There will be no further drawdowns under the SCI MTN, which will be terminated upon the repayment of the two remaining tranches due in October 2005 and June 2008, respectively.

We remain focused on maintaining an efficient and optimal mix of committed and uncommitted facilities, fixed and floating rate borrowings, prudent financial ratios and reducing the cost of funding. As at end 2004, committed funding consisted of 67% (2003: 75%) of the Group’s borrowings. The Group seeks to limit its interest rate exposure by adopting a prudent debt structure whilst balancing this with funding cost considerations and 59% (2003: 50%) of its overall debt portfolio is not exposed to interest rate fluctuations. Interest cover ratio rose sharply from 7.4 times in 2003 to 14.9 times in 2004.

The maturity profile of the Group is evenly spread over different maturities, which reduces the impact of refinancing risks. As at end-2004, 54% of the Group’s debt (2003: 36%) had maturities of one year or less. This was mainly due to the anticipated repayment of the outstanding debt with the divestment proceeds from SembCorp Logistics’ (SembLog) stake in Kuehne & Nagel International (KNI).



 

The Group’s concerted effort towards the improvement of its cash flow generation resulted in a significant improvement in cash flow from operations to S$528.5 million, compared to S$337.4 million in 2003. Better management of debt collection and credit terms contributed to the improvement in cash flow generation.

As a result of the strong operating cash flows and proceeds from the divestment of SembLog’s stake in KNI, the Group was in a net cash position of S$194.7 million at the end of 2004, compared to a net borrowing position of S$1.4 billion in 2003.


Financial Risk Management
As part of the Group’s Enterprise Risk Management framework, Group Treasury Policies and Financial

Authority Limits were reviewed and updated periodically. The Group Treasury Policies set out the parameters for management of Group liquidity, counterparty risk, foreign exchange and derivative transactions and financing. The Group utilises various financial instruments to manage exposures to foreign exchange, interest rate and commodity price risks arising from operational, financing and investment activities. Such transactions hedge the Group against fluctuations in the market prices of the underlying instruments.

The Financial Authority Limits seek to limit and mitigate operational risks by setting out different thresholds of approval required before entering into contractual obligations and investments.